CALPERS exposes taxpayers to unnecessary risks
Listing all the deficiencies of the California Public Employees’ Retirement System would be a daunting task. A long history of corruption involving socalled “placement fees,” dysfunctional governance, undue union influence and poor rates of return are themselves reasons why California needs fundamental pension reform.
Now we can add to that list how CALPERS’S mindless pursuit of progressive, feel-good causes exposes taxpayers to even greater risk.
In a scathing report released earlier this week, the American Council for Capital Formation blamed CALPERS’ poor investment results over the last decade on its increasing focus on “sustainable” investing strategies. Often referred to as ESG policies (environmental, social and governance) this strategy applies subjective opinions in an effort to measure the sustainability and “ethical impact” of an investment in a company or business. Of course, ESG judgments are as malleable as the varying opinions of those judging the criteria. Applying ESG standards as a primary investment strategy is the polar opposite of looking at actual financial performance.
According to the report, “During this time of increased ESG investing and activism, the fund’s performance has suffered, converting a $3 billion pension surplus to nearly $140 billion deficit over the past 10 years.”
The shift by CALPERS away from basing investment decisions on objective financial performance has also caught the eye of current employees and retirees who depend on CALPERS for their pensions. According to a recent Sacramento Bee article entitled, “Before CALPERS can save the world, public workers want it to save their pensions,” a police officer testified before the CALPERS board on ESG investing. The officer, who was also the treasurer of his local police association, stated, “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy.”
This is not to suggest that investors — either public or private — should shun investments in companies that have strong ethical standards or are focused on clean technologies. Quite the opposite. Many of those companies are solid performers. But so too are oil companies and gun manufacturers.
As noted above, even public employees are beginning to question ESG investment strategies by CALPERS, as well they should. But let’s not forget who remains the ultimate backstop for California’s public employee retirement plans — California taxpayers. Bad investment decisions and dysfunctional governance have already taken their toll as the slice of general fund budgets for both state and local governments dedicated to pension costs continues to “crowd out” other public needs.
Nothing could be more succinct than this statement from the Council of Institutional Investors: “When the managers take their eyes off the ball and the funds are mismanaged, taxpayers often have to make up the difference, especially with public systems like CALPERS — the largest public U.S. pension fund.”
Ultimately, the answer is phasing out California’s system of defined benefits and, as other states have begun to do, shift to defined contributions. For the employees, the latter are similar to 401(k) retirement plans, are portable and allow the employee to choose the level of risk that is right for them. The best feature, however, is eliminating future risk to taxpayers because their financial obligation would be met at the close of every pay period. That’s much better than having hundreds of billions in unfunded pension obligations that will burden future generations for decades.
In the meantime, however, Exxon and Smith & Wesson are still good investments.